埃克西爾能源 (XEL) 2008 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the fourth quarter 2008 earnings conference call. (Operator Instructions) This conference is being recorded today, Thursday, January 29, 2009. Now I'd like to turn the conference over to Mr. Paul Johnson, Managing Director of Investor Relations and Assistant Treasurer. Please go ahead, sir.

Thank you and welcome to Xcel Energy's year end 2008 earnings release conference call. I'm Paul Johnson. With me is Ben Fowke, Executive Vice President and Chief Financial Officer of Xcel Energy, and several others who can help answer your questions. Today we plan to cover our 2008 results and accomplishments. Please note that there are slides that accompany the conference call which are available on our website. Let me remind you that some of the comments may contain forward-looking information, significant factors that could cause differences from those anticipated are described in our earnings release and our filings with the SEC.

Today's discussion will focus on ongoing results which we believe represents the fundamental earnings power of Xcel Energy. Please refer to our earnings release for reconciliation of non-GAAP earnings. Before I turn the call over to Ben, I will cover our overall financial results and how we calculate ongoing earnings. 2008 GAAP earnings were $646 million or $1.46 per share compared with $577 million or $1.35 per share in 2007.

As you may recall, 2007 we reached a settlement resolving our dispute with the IRS involving our COLI program. As a result, our 2007 GAAP earnings include an $0.08 per share charge for the resolution of this dispute. Our 2008 GAAP earnings include a $0.01 benefit from the discontinued COLI program. This morning, discussion will focus on ongoing earnings which exclude the impact of COLI on our results. Ongoing earnings for 2008 were $1.45 per share compared with $1.43 per share last year. With that, I'll turn the call over to Ben.

Thanks, Paul, and welcome everyone. As Paul just mentioned, our 2008 ongoing earnings were $1.45 per share. This is at the low end of our guidance range and compares with earnings of $1.43 per share in 2007. The increase is primarily due to higher natural gas margins which increased earnings by $0.06 per share, our AFUDC earnings, which increased earnings by $0.06 per share, higher electric margins which increased earnings by $0.03 per share and lower O&M expense which increased earnings by $0.02 per share. These positive factors were offset by higher financing costs which decreased earnings by $0.05 per share, higher depreciation which decreased earnings by $0.03 per share. Higher conservation and DSM program expense, which is generally offset by higher margins, reduced earnings by $0.02 per share. Dilution from our September equity issuance (inaudible) and benefit plan reduced earnings by $0.03 per share and other items which reduced earnings by $0.02 per share. That summarizes the year end results.

Now, let me walk you through some of the details starting with margin. Our electric utility margins increased by $24 million or $0.03 per share for the year, largely driven by rate increases and rider revenue. Electric margin grew by $99 million from rate increases and rider revenue, including $48 million from rate increases in Wisconsin, North Dakota, Texas, and New Mexico. Conservation and non-fuel riders contributed $28 million and the MERP rider added $23 million. These drivers were partially offset by a couple of key items. Most notably, cooler weather during the summer reduced electric margin by $49 million. In addition, purchase capacity costs reduced electric margin by $30 million.

We're also experiencing slower sales growth in 2008. On a weather adjusted basis, retail sales grew by about 1.7%; however, weather adjusted residential sales were flat for the year. As many of you know, residential sales provide higher margins than the C&I class. The combination of lower sales growth and the change in sales mix resulted in only $22 million or about $0.03 per share of electric margin for the year. Normally, we would have expected sales growth to contribute $0.08 to $0.10 of earnings per share, so this represents an opportunity cost of $0.05 to $0.07 per share for the year and was an important factor in pushing earnings to the low end of our guidance range. The 2009 earnings guidance assumption, assumes relatively flat sales growth. This is the key assumption and we will need to monitor sales trends closely throughout the year. For more information, please refer to the electric margin cable in our earnings release.

Higher natural gas margins which increased $46 million or $0.06 per share also had a positive impact. The most significant drivers were rate increases in Colorado and Wisconsin which increased margin by $24 million. In addition, colder winter temperatures increased gas margins by $10 million compared with 2007. Sales growth and other miscellaneous items increased natural gas margins by a total of $12 million. Although I have discussed the weather impacts on both electric and gas margins, it might be helpful to talk about the overall impact on our results. In 2008, actual temperatures were fairly close to normal. However, in 2007 we did experience favorable temperatures which increased earnings by about $0.06 per share compared to normal. As a result, we have an unfavorable variance of $0.06 per share between the two years.

Turning to operating expenses, our 2008 O&M expenses were down $11 million compared with 2007. You might remember at the beginning of 2008, we were projecting an O&M increase of 2% to 3%. However, as the year unfolded and it was evident that sales growth would not meet our expectations, we began making necessary adjustments to our O&M budget. The most notable move was the decision to eliminate our annual incentive compensation which reduced 2008 O&M expense by $50 million. That reduction was partially offset by increases in other employee benefits. In total, employee benefits decreased $39 million for the year. Offsetting these reductions were higher labor costs, plant generation costs and bad debt expense.

In 2009, we expected our O&M expenses to increase more than usual for a number of reasons. We expected benefit costs would rise because we expect rather that benefit costs will rise because we have re-established our annual incentive compensation in addition to increased medical and pension expense. We're also expecting increases in nuclear costs. This is largely driven by the commission approved change in accounting resulting in a deferral and amortization of nuclear outage costs and increased staffing due to NRC requirements.

Moving on. Depreciation and amortization expense increased $23 million or approximately 2.8%, reflecting growth in our capital investment program. Conservation and demand side management expenses increased $16 million or 15.7% as the programs expanded which was consistent with public policy in our major jurisdictions. These costs are generally recovered dollar for dollar through various riders and rate cases.

Turning to allowance for funds used during construction. AFUDC increased $31 million compared with 2007 due primarily to the construction of Comanche 3, Ft. St. Vrain and other projects. We expect that AFUDC will decline as some of these large projects come online in 2009. That's a more detailed look at the financial results. I would like to take a moment now to summarize some of last year's significant accomplishments and events.

During 2008, we successfully navigated a challenging financing environment and raised $2.3 billion through a variety of transactions. This funding will enable us to continue to execute our building a core strategy despite continued challenges in the capital markets. In 2008, we achieved improved credit ratings. In November, S&P raised its senior unsecured debt ratings of NSP Minnesota and Public Service Company of Colorado to BBB plus and raised NSP Wisconsin to A minus. As you know, credit quality, a strong balance sheet and conservative financial management have always been important to us, so it is encouraging to see the one notch upgrade from S&T.

As a result of the market meltdown, many companies are grappling with the issue of pension funding. Early in 2008 we were in great shape compared with most of our peers because our qualified pension plans were 120% funded on a PBO basis. However, with market deterioration, our consolidated pension plans were funded at 84% at the end of 2008. Our current plan is to invest within a range of $70 million to $130 million in our pension plans in 2009. All of these estimates are subject to change. Pension contributions in 2010 could be in the range of $150 million to $250 million based on conservative assumptions. We anticipate that contributions in 2011 and beyond will decline from these levels. Ultimately, funding will depend on realized asset performance, future discount rates, actuarial assumptions, IRS and legislative initiatives.

On the regulatory front, we had a very busy year, including the completion of a couple smaller electric rate cases in December. First, in our electric limited reopener Wisconsin, the commissioner approved the stipulation agreement entered into by NSP Wisconsin and various interveners authorizing a $5.6 million rate increase for base costs and fuel expense. This increase will be offset by a refund from declining fuel cost so customer bills will not increase in 2009. In our North Dakota electric rate case, the commission approved a settlement agreement that calls for a $12.8 million rate increase based on an authorized ROE of 10.75%. In our Texas case, we've been actively negotiating with various parties since November and we are hopeful to have a settlement in the near future that will allow us to improve the regulatory returns at SPS.

In the fourth quarter, we filed a couple of cases that will make an impact in 2009. In Minnesota, we filed a case to increased electric rates through $156 million or about 6%. Interim rates of $132 million went into effect in January. We expect a decision later this fall. In Colorado, we filed a case to increase electric rates by about $175 million or 7%. In this case, we're seeking a forward [test] year and expect a decision later this summer. Finally, in New Mexico, we filed a case to increase electric rates by about $25 million or 5%. We're also seeking interim rates for a portion of the overall request related to a capacity contract. Our regulatory strategy has always been to file straightforward no frills cases. This is especially true given the current economic downturn. We focus our request on the value we provide to customers. As always, our guidance range for 2009 assumes we will receive reasonable regulatory outcomes from our pending filings.

Our list of accomplishments also includes several noteworthy capital projects. As we've mentioned in the past, one of our goals is to own more renewable energy assets. In 2008 we made significant progress on this front by completing our Grand Meadow wind farm, a 100 megawatt facility in Minnesota. Grand Meadow, which began operating in December, was completed on time and on budget. In addition, we signed contracts for two additional wind generation projects in Minnesota and North Dakota which will add 351 megawatts to our system by the end of 2011. We estimate the cost of these projects at about $900 million, which is included in our capital forecast. Regulatory approval is pending and once construction is underway, these projects will qualify for rider recovery in Minnesota.

You may remember that the original RFP was for 500 to 700 megawatts of incremental wind generation. However, we decided to scale back the project in light of the current economic climate. Nevertheless, we remain on track to meet the renewable portfolio standards in our jurisdiction and continue to expect to have more than 7,000 megawatts of renewable generation online by 2020. We're also very pleased with the progress we made in 2008 on our major construction projects. Those include the metro emission reduction project in Minnesota, also known as MERP, as well as our Comanche 3 and Ft. St. Vrain projects in Colorado. In 2009, we expect to complete the MERP effort with the repowering at our Riverside plant. In Colorado, Comanche 3 and Ft. St. Vrain are scheduled to come on line in 2009. With these projects complete, we will have added about 1100 megawatts of capacity to our system at a very competitive cost for our customers. We expect them to finish on-time and close to their original budget.

Finally, we recognize that a competitive dividend yield is an important component of the value proposition we offer our investors, especially in a turbulent market. In May, we increased our dividend by $0.03 per share or a little over 3%. This is consistent with our long-term objective of annual increases in the 2% to 4% range which we don't plan to change.

To wrap things up, it is clear from our 2008 results that we weren't immune to the current macroeconomic environment. We believe that those conditions will affect our near-term sales growth which is reflected in our 2009 earnings guidance. As a result, the midpoint of our earnings guidance range of $1.45 to $1.55 offers modest growth relative to our long-term objective of 5% to 7%. When things improve, we will be in good position to resume our long-term earnings growth trajectory. Given our strong credit quality and relatively modest near-term financing needs, we're well positioned to continue to execute our overall growth strategy in 2009 and beyond. With that, let's open it up for questions.

Thank you, sir. (Operator Instructions) First question is from the line of Greg Gordon with Citi Investment Research. Please go ahead.

Thanks, good morning.

Hey, Greg.

You guys just got interim rates in Minnesota and that was earlier in the year than I would have expected. That's positive. So, when I look at the range, the guidance range that you've outlined for us, I know that there is a baseline assumption vis-a-vis sales expectations in terms of kilowatt hour sales or look thereof. Can you tell us what, if the baseline you've given us and the sort of summary of drivers represents the midpoint and what the high and the low, all things equal might represent in terms of sensitivities and then in the context of what you're actually seeing vis-a-vis demand? I know it is early in the year.

Yes, Greg, I mean good question. We typically put our assumptions, we add it all up and take the expected values that would put us about in the middle of the range. A penny either way. That's where we typically try to set guidance. And this year's been no exception. I think the key things for us to track are obviously the regulatory outcomes is a big part of our success next year, but we need to monitor sales trends. We saw, as you know, flat sales, full year for 2008. The fourth quarter we actually saw some improvement on the residential side here in Minnesota. Saw a little bit of weakness in PSCo. We continue to look at this closely. We think our assumption is right. We're prepared to react if it's not. Love to see sales improve, but at this point I think assuming flat sales is probably the right way to go.

Thank you.

Thank you, sir. Our next question comes from the line of Angie Storozynski with MacQuarie Capital. Please go ahead.

Thank you. I'm going to go back to assumptions for 2009 guidance and then I have a question about pensions. When you look up your 2008 electric sales growth for retail, they're actually up 1.7%. The flat sales only for residential. And then gas was up on a weather normalized basis almost 2%, 1.9% which is kind of surprising at least for me. If you assume flat year over year electric sales and gas sales, you simply assume that the pattern for '08 will be retained which would be surprising to me given the weakness in industrials and commercials. And that's what drove your growth in electric demand in 2008, so how could you reconcile these numbers? And, secondly, if you could talk me through your pension accounting. I understand the funding requirements for '09 and '10, but if you could tell me what the earnings impact is going to be and why we're seeing higher impacts for 2010 from funding perspective than for '09 and what kind of assumption do you have for returns for the pension plans in '09.

All right. If I forget one of the questions, remind me. I think you wanted to talk about funding, the pension assumptions, the pension expense and why we basically don't see more of a reduction in this CNI class next year.

That's correct. I mean it is surprisingly strong. The results for the annualized results for '08. On a weather normalized basis seems very strong comparatively.

Let me shed some light on that for you. If you break it out by jurisdiction, by far the biggest positive increase in CNI was at SPFs which was largely driven by the energy service field. And I would say also that that is largely driven by the large CNI customers which, as I reported to you before, we typically don't have the same margin of profitability particularly with large CNI. It is not as energy megawatt sensitive as it is more capacity-type charges. So, while you see the sales tick up, we didn't see a lot of margin for it which is why the sales mix didn't come in as it usually does. If you look at our other jurisdictions, NSP (inaudible) was for a full year just under 1%, PSCo was 1.8%. So, I mean we looked at those trends and assessed the economies that we're operating in which while they've been impacted by what's happening in the general economy, they've done a -- fared a little bit better than the national average. So, we remain comfortable with that.

How about gas? How about gas?

Yes, you asked that question. Gas, we really saw a pickup at PSCo, not so much NSP (inaudible). As you probably know, PSCo is by far the largest gas operation that we have. I don't have a really good answer why it picked up so much. It surprised us, too. Other than I would say, gas prices did modulate particularly in the Rockies this year and perhaps our customers were a little less price sensitive. Does that answer your sales questions?

It does. Ok. Let's move on to pensions then.

Let's move on to pensions. Let's start with the funding assumptions. I said in my prepared remarks that I think we're using conservative assumptions. I'll shed some light on that. I mean we're making -- our actuary assumptions long-term are that the assets perform at 8.75% and we have a discount rate on the liability side of 6.75%. What we did for our funding calculation is assume that this year we have basically flat asset performance. So, I think that's hopefully a bit conservative.

We also, if you get into the details of pension not so much accounting but the PPA rules, there is elections you can make to either keep assets at market or smooth them. Currently, we're at market. We like -- we're contemplating and we'll probably make the smooth assets, that will give us quite a lot of relief and with all things equal, push us on the low end of the 150 to 250 range I mentioned for 2010. I think I misspoke before. The asset assumption is 8.5% not 8.75% by the way. We brought it down from where it was in '07. So, no asset return basically in 2009. And the range that assumes the difference between the assets smoothing election or not for 2010 and I think that should put us, I hope, in a conservative light for 2010. Post-2010, the funding requirements will decline. That's the funding side. I think you had a question about expense, too.

That's true.

Okay. On the expense side, we did see an increase in pension expense this year in the $12 million to $14 million range. Last year, we had a negative pension expense. This year, I think it is a $12 million, is that right, [Teresa]? $12. That would be about a $14 million swing. We'll see about the same kind of -- we'll see that kind of expense increase over the next couple of years, about at that same range. As you know, pension accounting is very much has a smoothing impact. The pension expense will tick up a little bit over the next three years. It is not going to -- it will be gradual and in the kind of ranges I've described to you.

And it is accounted for in your O&M projections, right? So, you were basically able to offset any pension increase, pension cost increase by reductions in O&M expenses and other O&Ms?

Yes, well, let me answer the question. Between pension and medical, we're assuming a $25 million increase in 2009 over 2008. Part of that is the pension expense that I mentioned. Part of it is medical and part of it is retiree medical for the other piece.

For 2010?

2010, you would probably see that -- I can't speak to the medical side at this point. I don't have it in front of me. On the pension side, you would see that increase about $12 million all for that. That clearly is baked into our guidance.

Ok. Thank you.

Thank you.

Thank you, ma'am. Our next question comes from the line of Mark Sigal with Canaccord Adams. Please go ahead.

Hi, good morning. Wondering if you could just provide a brief update on your Smart Grid programs, where the status of those might be and your anticipated plans in the future?

The project is well underway. As you know, that's a pilot program in Boulder where we're taking all of Boulder and really, we call it Smart Grid city where we are not only putting in two-way metering but monitoring devices at the customer's election behind the meter so they can monitor energy consumption, can do it remotely. Then, what we're also doing is before you get to the meter, putting in software and basically digitizing an analog system so that we get a better read of transformers and can be more proactive in anticipating failures. I think we're a little more than halfway through probably a little more than that, the roll out. And what our plan is to finish the project, assess the various technologies that we're researching and come up with conclusions on what makes sense to perhaps roll out more deeply within our jurisdictions. Obviously, share that with our commissions and the learnings and then take it forward from there.

Okay. Any sense on the timing if you do decide to move forward on any of those initiatives, what time frame you might be look at?

No. The first step is to get the results. The second step is to share it with our commissions. Then we'll take it from there.

Ok, thanks very much.

Thanks.

Thank you. Our next question comes from the line of [Dan Jenkins] with the State of Wisconsin investment board. Please go ahead.

Hey, Dan.

Hi, good morning. First of all, I was wondering, have you made any revisions to your CapEx budget that you presented at IIE given the economic changes since then?

Well, I think you might have been at the analyst day. We haven't changed our CapEx forecast since then. That CapEx forecast reflected a reduction in how much wind ownership we were going to pursue, as I mentioned. Originally, we thought we would get ahead of the [RPF] standards. Now, we're pretty much staying on track with those RPF standards.

Okay. You mention in the release your financing plans, $400 million for -- of FMBs for both in NSP Minnesota.

Dan, can you speak up a little bit?

In the press release, you mentioned your financing plans of $400 million for both NSP Minnesota and Public Service Colorado. I was wondering do you have any sense of the timing of those?

George, when are we going to do that?

Second.

Second and third quarter, Dan. And that represents, I think that's about $350 million of incremental debt. Some of it is used to retire maturing debt.

Okay. Then I wanted to get a little more feel for your CNI sales. They seem a little bit higher than what we're seeing in other parts of the country. Just can you give me like a sense of what the distribution is industrial-wise that would make maybe your sales look a little better than the national average or are you hearing anything about any layoffs or plant closures or whatever in any of you service territories that might impact that?

Listen, our territories I think are faring better than the national average but they are not immune. I mean we just heard that Target, for example, was having layoffs here just yesterday. So, yes, there are layoffs that are happening. And again, as I said before, I think the results of our CNI sales results are a little bit skewed by what happened at SPS where for a full year the CNI class grew by 6.7%. Again, that's largely with a big CNI customers which we really don't make much of a margin on the energy sales, the margin's typically made on the demand charge.

Dan, the other thing I might add is you know, as we look into 2009, we expect to see in our numbers, as we expect to see quite a bit of softness in small CNI class which obviously the retail will be affected there. So, that is reflected. So, while we did have strong CNI sales in 2008, we do expect some moderation of that as we move forward into 2009.

Okay. Thank you.

Thank you. Our next question comes from the line of [Michael Runay] with Robert W. Baird. Please go ahead.

Good morning. [Michael Grayson] that is. In relation to the rate cases for Minnesota and Colorado, just wondering what your assumptions within those rate filings were relative to some of the key items that you talk about like the lower weather-adjusted sales growth and the higher pension expenses and the sense of compensation and the like?

Well, the basically all of those assumptions are embedded in those rate cases.

Okay. So, there's been no deterioration in your outlook since then that would cause those rate cases not to fully reflect your current expectations?

There's been a bit of deterioration for example in the pension expense and those sorts of things and a couple of things I will say about that, we will have an opportunity to introduce any changes, positive and negative in rebuttal. So, we can do that and I would also point out that just like we did last year in 2008, we certainly have contingency plans to adapt to the economy to adapt to whatever comes our way. One of the things we did at the very beginning of this year is decided that we would give no raises to the executive or senior managers of the Company and that we would defer merit raises until later this year. So, I think we're certainly reacting to what's happening in the economy not only since we -- rather I should say since we filed the rate case. So, I don't know if I answered your question.

Yes, that helps. Thank you.

Thank you, sir. And our next question is from the line of Danielle Seitz with Seitz Research. Please go ahead.

Hey, Danielle.

My questions have been answered. Thanks.

Oh, good.

Thank you, ma'am. Our negotiation question is from the line of Paul Ridzon with KeyBanc. Please go ahead.

Paul?

Hey, Ben, how are you?

Good.

What are you seeing in Washington and what are your expectations about the timing of carbon legislation?

Carbon legislation?

Carbon, climate, same thing, yes.

Well, obviously it's front and center and we're seeing some of that addressed with some of the energy policies addressed for this stimulus bill that was passed by the house yesterday and we certainly like seeing the PDCs extended. As far as climate goes, that's hard to say when we'll get climate legislation. I think the over under is beyond '09, although we believe certainly is realistic to think we might see something on a national RPS standard in 2009. That's of how I would handicap it, Paul.

You've built and are continuing to build a pretty decent footprint from the renewable standard and given the way the world is changing and the direction it is going into, are you getting approached by any companies who might want to marry that type of footprint just to diversify what might be a large carbon concentration?

As you know, we don't really comment on M&A. I think that's what you're referring to. I think what we are seeing is people wanting to partner with us to build renewable plants and look at other technologies and what the renewable leadership position we have has helped us -- helped shape the rules not only in this state but increasingly, I think we're getting recognized at a federal level. So, I guess people envy that. But we are in a unique position, Paul, that the renewable generation that we have right in our backyard is reasonably economical. We have solar resources in the south and people should envy us. I think we're in pretty good shape to address what's coming.

Okay. That's fair enough. Thank you.

Thank you, sir. I have no further questions in the queue. I would like to turn the call back over to management for any closing remarks.

Thanks, everyone for participating today. If you have any further questions, please don't hesitate to give Paul Johnson and the rest of the IR team a call. Thank you.

Ladies and gentlemen, this concludes the Xcel Energy fourth quarter 2008 conference call. This conference will be available for replay after 1 o'clock central time today through Saturday, January 31 at midnight. You may access the replay system at any time by dialing 303-590-3000 or 800-405-2236 and entering the access code number of 11123303. Thank you for your participation. You may now disconnect.